Trouble Where You Least Expect It: Claims by Your Client’s Officers, Employees, and Members of the Board
by Jennifer A. Becker(County Bar Update, August 2004, Vol. 24, No. 7)

Trouble Where You Least Expect It: Claims by Your Client’s Officers, Employees, and Members of the Board

By Jennifer A. Becker, partner, Long & Levit, LLP, San Francisco. Becker has been involved in all aspects of the litigation of professional liability claims against attorneys and other professionals for 18 years. Long & Levit, LLP, established in 1927, has a tradition of defending attorneys through its Professional Liability Practice Group, led by Joseph P. McMonigle, former chairperson, ABA Standing Committee on Lawyer’s Professional Liability. For regular Professional Liability Updates reporting on important cases affecting attorneys, see www.longlevit.com/liabilityupdates.html. To join Long & Levit’s e-mail list to receive updates as they are published, contact Jennifer Becker at jabecker@longlevit.com

Attorneys deliver services in a progressively complex environment in which they must manage the risk of claims not only from their own clients but also from third parties. In advisory and litigation settings, attorneys’ interactions with their client’s officers, employees, and board members can unintentionally create expectations that can result in claims. What is the analytical framework for claims by individuals connected to the entity client, and what can practitioners do to prevent them?

In Lucas v. Hamm (1961) 56 Cal.2d 583, the California Supreme Court relied on its holding in a prior case against a notary, Biakanja v. Irving (1958) 49 Cal.2d 647, 648-650, to set forth an analytical framework to determine when an attorney owes a duty to a non-client. The factors are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, whether expansion of liability will place an undue burden on the profession, and the policy of preventing future harm.Lucas at 589.

In almost any case, these factors can be manipulated to argue for an extension of liability. Despite later cases that refine these elements and limit exposure, many third-party claims make it past the demurrer and even summary judgment stages due to a superficial application of the Lucas factors. This is especially true when the third-party claimant has a connection to the client. While it is easy to see why an attorney should not have responsibilities to an adversary, the issue is murkier when the third party is aligned with the client.

Attorneys representing entity clients can be especially vulnerable to claims. Often the attorney’s continued employment depends on ongoing personal relationships and the trust and confidence reposed in the attorney by the board members, officers, and employees who receive advice on behalf of the entity. This can create expectations inadvertently in these individuals that they can rely on the attorney’s advice even if the attorney does not represent them individually. The equation becomes even more complicated in situations where an attorney does undertake in a particular matter the representation of an individual board member, officer, or employee while continuing to maintain a relationship solely with the entity client on other matters.

Application of the Factors

Consider, for example, a board member of a public entity applying for an employment position at the entity. The entity’s attorney fails to properly advise the board about how to avoid Government Code conflicts-of-interest provisions. After the employment has commenced, both the board and the employee are the target of a taxpayer’s lawsuit. The plaintiff board member/employee, who never retained personal counsel, argues the conflict of interest advice was “intended to affect” the plaintiff. There is case law that refines the “intended to affect” factor by recognizing that attorneys’ actions often have an effect far beyond the sphere of the client, and that factor alone is insufficient to impose liability.Goldberg v. Frye (1990) 217 Cal.App.3d 1258, 1268. In practice, courts rarely look beyond the fact that an attorney’s advice predictably would affect the third-party claimant.

Plaintiff will argue that it was foreseeable that violation of the conflict-of-interest rules would leave the employee vulnerable. The employee is damaged due to fines and penalties assessed. Imposing liability will prevent a future similar failure to advise. So far, plaintiff’s counsel has shown a perfect fit between the factors and the plaintiff’s situation.

The “undue burden on the profession” element is the most misunderstood factor and the one that offers the most hope for an early dismissal of the lawsuit. In Lucas, this factor referred to the financial burden of liability.Lucas, supra at 589. More modern case law uses this term to refer to the divided loyalty that is created when an attorney is expected to represent the interests of the client and at the same time serve the interests of the third party. What the court should do is look at the potential for conflict in imposing liability for advice to both the client and the third party. If a simultaneous duty to both the client and a third party could inject the possibility of undesirable self-protection into the attorney’s counseling role, there is an “undue burden.”Goodman v. Kennedy (1976) 18 Cal.3d 335, 344.

In the example above, an attorney advising a governmental entity about the conflicts inherent in employing a sitting board member would be hampered because the advice could result in denying the board member the employment opportunity. Another example is a corporate attorney, advising board member/stockholders about a merger or dissolution, who could be hampered if the attorney must consider not only the best interests of the corporation but also the economic interests of the individuals.

What occurs in practice is that courts evaluate this factor with 20/20 hindsight. The potential for conflicting loyalty is disregarded, and absent proof of an actual conflict between the objectives of the client and the third party, courts refuse to dismiss a case in the pre-trial stages. The fact that at trial or on appeal careful review may result ultimately in victory for the attorney is cold comfort after the attorney has paid a deductible and devoted countless hours to defending a claim.

Risk Management Solution

Attorneys representing entity clients should constantly evaluate whether their advice will have a direct or indirect impact on the individuals who receive the advice on behalf of the entity. For example, employee/stockholders may be impacted by advice given to a corporation about the effect of a merger or corporate dissolution. This also can include officers of a corporation whose jobs may be affected by advice about a takeover by a rival. In short, any setting where the advice given to the entity through individuals may impact the interests of the individual calls for certain precautions.

In this, as in all situations, the most valuable risk management tool is clear communication. It is worth reminding these individuals early and often that they are not entitled to rely on your advice to assess their personal situation and that they need to seek independent counsel. While it may seem abrupt to discuss these issues with the individuals who make the decision to retain or terminate counsel, it can be done in a manner that is tactful and that demonstrates the attorney’s depth of knowledge, attention to detail, and ethical behavior. Ideally, there should be a written record of this advice. Evidence of an attorney’s clear delineation of responsibility solely to the entity will discourage many claims from being made. If a court does engage in weighing the Lucas factors in the event of a claim, this is powerful evidence to tip the scale on the side of non-liability.

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association, Aon and its affiliates nor the author assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available by Aon Direct Insurance Administrators, administrators of the LACBA Sponsored Aon Insurance Solutions Program, to the LACBA members.www.aonsolutions.com